Types of contract jobs: definition; advantages and disadvantages
There are two main types of contracts. Or in other words, a contract job may assume two types of aspects
i). Fixed price contract
ii). Cost plus contract
Fixed price contract
1.1 Definition
As the name suggests, this is a category of nature of contract where by the price of the contract is constant or fixed and it does not change with economic changes in the future because the price is already agreed up on. With this kind of contract job, there cannot be further adjustments on the contract price in the future.
1.2 Advantages of fixed price contract job
1). Fixed price contract helps in controlling expenditure by the organization.
This is a contract with a constant price which cannot vary no matter what. This is because this contract job price is already predetermined and therefore there is no room for unnecessary future upward adjustment of the contract price which could lead to more spending.
2). Easy to set the profit margin of the project.
Since the cost associated to contract jobs are clearly stipulated for, they are direct, then the setting of the profitability or margin is not complicated.
3). Marketability of the contract job is simplified.
Stable price of the contract job since the value set by the concerned parties does not change, this fact makes it possible for the contract be saleable to the end consumers.
4). Possible to budget for capital projects.
Since the fixed price contract is known, the management can budget for the purchase of the machinery as stipulated in the budget. You see, when the prices are stable, they get alighted to the set budget and no further restructuring of the budget to fit a complimentary budget which is inconsistent.
5). Faster completion of the contract job.
Since the price of the contract is fixed and the contractor cannot take advantage of the price increases due to inflation, then he/she ensures that the project is completed within a shorter period.
6). Increased certainty of the contract job
Fixed price contract is a sure bet when it comes to timeline set. The goodness of this approach is that no delay in completion of the contract then dedication of the same to the planned intention. This in return eliminates opportunity cost lost.
7). Minimal supervision of the contract job
This type of contract jobs requires less supervision since the contractor cannot take advantage of delaying the completion. As a result, the client saves supervision money.
1.3 Disadvantages of a fixed term contract job
1). Comparatively client pay more for the contract job (pricewise it is costly).
When the price trend for resources used to construct the contract is declining due to favorable economic conditions, it is then the contractor to benefit while the client will suffer financial loss especially if there was prior arrangement to have a fixed price even if it was high.
2). Process rigidity is expected
Terms of this contract is not flexible due to changes in economic dynamics and this means lack of logic.
3).Lack of proper communication
Due to laxity of adjusting the contract as per the expected changes, this may result to some omissions which may adversely affect the parties especially when issues of legality come in.
Cost plus contract job
Cost plus contract is a job where by the client pays a certain agreed price over and above the cost of the contract based on a certain percentage of the indirect cost and profit already set. This contract is the opposite of fixed-price contract and it is a job whose price is open ended such that the two parties agree to suspend the final price for the job as long as there is no formula of determining the final price in a reasonable manner especially when there is no historical data. For example, a venture such as borehole drilling job.
2.1 Advantages of Cost-Plus Contract Job
1).Stable profit margin
Since the price of the contract is already predetermined, this is a sure bet as far as margin to be reaped is concerned.
2. Less risk
This kind of contract is less risk for the prices are fixed hence any external factors causing its decline is nullified. For example, future price fluctuations.
3).Safeguarding of the client
Since the prices is fixed, there is assurance on the side of the client that there will be no frustrations from the side of the contractor by changing the goal posts already set.
4).Cheap pricing
The pricing of the contract job is based on the actual cost of the contract. So, the price is at its lowest level. Hence convenient for the client.
2.2 Disadvantages of Cost-Plus Contract Job
1).No motivation on the side of the contractor
Since the pricing of the contract is on the basis of the cost of the contract, the profit margins are low.
2).High chances of disputes between the two parties.
Because the main objective of the contractor is to maximize the profits, any case of low pricing of a contract is not pleasing to one party while it is joy to the other and this may cause chaos or disagreement along the way.
